June 2001 Bulletin

Business Will—not ‘if’ but ‘when’

Document guarantees practice will survive if partner dies, becomes disabled or incapacitated

By Ronald P. Perilstein and Lawrence Chane

It’s not a question of "if" but rather a question of "when." The management and/or leadership of your practice will change and you’ll never know whether it can survive unless you have a "Business Will."

A Business Will helps to separate the life of the business from the life of its owners, to anticipate possible future events in the business, and to guarantee that it will continue to exist. What will happen to the practice if a partner dies, becomes disabled or incapacitated, or retires? How will the deceased, disabled or retired partner or his or her family be compensated?

When considering the possibility of a disabling condition, a partner probably expects that the practice will continue to pay his or her salary for a number of years. In addition, if he or she contemplates the eventuality of death, there is probably a mental picture of family members receiving cash for his or her share of the practice so that their income will not be dependent upon the decisions of surviving partners.

Surviving partners naturally have their own agendas and mental pictures. Typically, they do not want inexperienced, non-active members of their partner’s family to be involved in the operations of the company. The Business Will helps to resolve these and other important issues.

Business continuity is not automatic and there is a considerable amount of planning involved. It is essential that this planning take place before a partner dies, becomes disables, or is ready for retirement.

The Business Will, more commonly called the "Buy-Sell Agreement," is a legal document that provides for the purchase and sale of the stock or other ownership interest in the practice, based on a predetermined procedure for determining when the transaction is "triggered," (such as death, disability, retirement, withdrawal from the business, or involuntary transfer of one of the partners); the purchase price to be paid; and the terms of payment.

An effective Buy-Sell Agreement should protect all parties from disadvantage by including all essential provisions key to the success of the arrangement. These provisions include, but are not limited to the following:

For agreements funded with life insurance, the provisions also should include instructions for the purchase of the life insurance; for agreements funded with disability insurance, a definition of disability that reflects the provisions of the policy itself and outlines the circumstances at what point the buy-sell will be activated; and for installment purchases, the terms and conditions of the payment plan.

The Business Will should specify how the purchasing party will pay for the business interest. Typically, these options include cash payments from savings, borrowing, an installment sale, disability insurance proceeds, or life insurance proceeds.

Planned savings can be impractical since triggering events are likely to occur with little or no notice, and complete funding cannot be assured. Borrowing can be equally impractical since much of the lender’s security depends on the stability of the practice, which may be threatened by the partner’s withdrawal. With installment sales, the payments will drain current earnings and force the heirs of the departing partner to rely upon the future success of the business, over which they no longer have any control.

Given these potential problems, disability and life insurance are essential to the continuity plan and typically proves to be the least costly of the various funding options. The most significant advantage is that complete financing is guaranteed from the beginning. An immediate lump sum payment to the deceased partner’s estate is generally feasible only if life insurance proceeds are available to fund the payment. Furthermore, if permanent policies are used instead of term, cash values in the policy can also be utilized for a buyout of a retiring or disabled partner and allow the withdrawing partner to keep the policy. Life insurance funding avoids bank problems. On the disadvantage side, insurability may be a problem or, due to age differences among shareholders, premiums may not be equitable.

The Business Will is an extremely important part of a continuity plan and should be addressed before any problems arise.

Ronald P. Perilstein, CLU, is president of The Arjay Group, Inc., an insurance firm located in Narberth, Pa. Lawrence Chane, is a partner of Blank Rome Comisky & McCauley LLP, Philadelphia Pa.


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